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Willisms

« A Message To Squeamish Republicans On Social Security: Reform Is Good Politics. | WILLisms.com | Wolfowitz To Replace Wolfensohn As World Bank Chief »

Do Personal Accounts Achieve Solvency For Social Security?

One argument against personal accounts made in recent weeks is that they do not achieve solvency in the Social Security system.

So, do they? Do personal accounts solve the problems Social Security faces?

Unequivocally: YES.

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The Chief Actuary of the Social Security Administration, Stephen C. Goss, a fiercely non-partisan career government employee, has crunched the numbers and come to this conclusion:

Personal accounts do achieve long-term solvency in Social Security over the next several decades and beyond... permanently.

When you think about it, personal accounts are really the only way to put Social Security on a course of permanent solvency.

Do they solve the crisis in a vacuum; do the personal accounts, by themselves, fix the entire problem without any other action?

No.

That option (personal accounts as the one and only solution) would be called "add-on accounts." And add-on accounts are not what the President is proposing, although people do seem confused on that point. Indeed, misinformation is the single-most profound obstacle right now preventing reformers from gaining traction on Social Security.

Legitimate reforms would include personal accounts, but would find one or more ways of addressing the short-term transition. Issuing bonds would be one way. Changing the way benefits are calculated from wage-indexing to price-indexing would be another way. Raising taxes, expanding the tax base, raising the retirement age, and cutting benefits would be less attractive ways.

But those kinds of fixes would only get Social Security over the hump, at which point the self-sustaining personal accounts would have worked their way into the system. Those band-aid fixes become far more difficult to implement as time passes, because Social Security's obligations increase to the tune of roughly $600,000,000,000 (that's 600 billion) with each year that we do nothing.

Unfortunately, reformers have not effectively defended this idea in the public square.

While President Bush has only laid out principles of reform, a U.S. Representative from Wisconsin, Republican Paul Ryan, has offered a plan that matches those principles of reform.

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Under Ryan's plan, Social Security would become solvent (not based on mere political hopes and dreams, but according to actual actuarial analysis)

Specifically, Ryan's plan would allow younger workers to redirect up to 6.4% of the 12.4% total payroll tax into a personal account. Individuals would have three account options, ranging from aggressive to very conservative. Workers would receive recognition bonds for the contributions they would have made up to the point of the program's implementation.

Goss, the Chief Actuary, had this to say about how the plan would affect Social Security's solvency:

...the Social Security program would be expected to be solvent and to meet its benefit obligations throughout the long-range period 2003 through 2077 and beyond.

But what about cumbersome administrative fees? Wouldn't the accounts just be a huge government kickback for Wall Street?

No. Goss estimates the accounts would have administrative costs of one-fourth of one percent (25 basis points).


Another plan involving personal accounts is the Institute for Policy Innovation's "A Progressive Proposal For Social Security Private Accounts." Under this plan, authored by Peter Ferrara, workers would be able to divert 10% of the 12.4% payroll tax, up to 10,000 dollars, to personal accounts. Beyond the 10,000 income level and up to the payroll tax cap level (which slides upwards each year to keep pace with inflation), workers would have the option of putting 5% of the 12.4% obligation into personal accounts. To cover the "transition costs" of the reform, the government would issue bonds. Ferrara notes:

These bonds do not involve new government debt, but just explicit recognition of the effective debt already existing in the unfunded liabilities of Social Security. These bonds could then be paid off over a 30 to 40 year period. The reform itself would ultimately produce surpluses that would help pay off the bonds.
What, then, did Social Security's Chief Actuary say about Ferrara's plan?

Under the "Progressive Personal Account Plan," the Social Security Administration asserts:

...the Social Security program would be expected to be solvent and to meet its benefit obligations throughout the long-range period 2003 through 2077 and beyond.


Another proposed solution including personal accounts is that of Democrat Bob Pozen, a member of President Bush's 2001 Commission to Strengthen Social Security. Pozen's plan would include indexing benefits to the Consumer Price Index (inflation) rather than wages. It would also establish voluntary personal accounts, although smaller ones than found in the Ryan and Ferrara proposals.

But, Stephen C. Goss crunched the numbers and found that Pozen's plan would also achieve solvency.

Another plan involving personal accounts is Nebraska Senator Chuck Hagel's "The Saving Social Security Act of 2005," which would allow for 4% personal accounts for those who are under age 45. Hagel, potential 2008 GOP nominee for president, would would also raise the retirement age to age 68 and modify early retirement and delayed retirement factors, providing incentives for individuals to delay benefit entitlement and work to a higher age.

Again, the Social Security administration's actuarial analysis (in .pdf format) shows that Hagel's plan would achieve solvency.

When reform naysayers claim that "personal accounts do nothing to achieve solvency in Social Security," they are, at best, just flat-out wrong. At worst, they are intentionally disingenuous.

Obviously, adding personal accounts by themselves do not fix Social Security's problems, entirely. But personal accounts must be a part of any serious long-term and permanently sustainable solution. The only hitch is finding a way to transition from here to there.

Obviously, from the options listed above, there are many options for covering this transition. Issuing bonds is an attractive option, because it would allow no changes for benefits, retirement age, or payroll taxes. But some worry that issuing too many bonds would spook the international markets and put the U.S. in a vulnerable economic spot.

Alan Greenspan and other economists have attempted to dispel this "the-sky-is-falling" notion by explaining that "debt is debt," and the Social Security obligations the government currently owes are already factored into the market. Right now, the debt is merely unfunded and unrecognized. Issuing bonds would merely recognize the debt on the government's balance sheet.

Other ways of getting over the transition hump without significant increased short-term borrowing would be the kinds of items Chuck Hagel and others have offered. Changing the way annual benefit growth is calculated from wages to prices, for example, would be one way to get over the hump, while personal accounts work their way into the system.

The bottom line, however, is that without personal accounts, Social Security will need major (and increasingly painful) reforms every generation or so. Scrapping the Bismarckian Pay-As-You-Go pyramid scheme system of funding Social Security and replacing it with personal accounts is the only way to fix Social Security permanently, short of completely eliminating the entire program (something no mainstream political figure today is calling for).

Thus, ACTUARILY, PERSONAL ACCOUNTS DO SOLVE SOCIAL SECURITY'S LOOMING SOLVENCY CRISIS. Social Security's Chief Actuary has said as much.

Posted by Will Franklin · 16 March 2005 12:00 PM

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